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Sweeten the China-Pakistan free trade agreement


Ali Hassan |

The Pakistan Business Council (PBC) recently sent a set of recommendations emphasizing the need for the government to focus on the ‘Make in Pakistan’ drive in order to improve the economy.

As part of its proposals, the advocacy group has pointed that there’s a need to renegotiate the Free Trade Agreement (FTA) with China, not only to promote domestic manufacturing and employment but also to address Pakistan’s mushrooming trade deficit with an indispensable strategic partner.

The flood of imported consumer goods and the non-availability of their local substitutes point to local SMEs [Small and Medium-sized Enterprises] losing ground in the domestic market.

Pakistan and China entered into trade relations in the 1950s. The start of this millennium witnessed a new era of trade relations, as both countries signed multiple agreements and Memorandums of Understanding. As a result, the bilateral trade between the two countries increased from US$ 1.07 billion in 1997 to US$ 4.26 billion in 2005. In 2006 the two countries signed the China-Pakistan Free Trade Agreement (CPFTA), with the aim to further strengthening mutual friendship as well as expanding and diversifying trade.

Bilateral trade has subsequently expanded from US$ 2.2 billion in FY05 to US$ 13.8 billion in FY16. However, the balance is tilted in China’s favor, as Pakistan’s exports to China have not kept pace with its imports from the country. Pakistan’s exports to China increased from US$ 0.4 billion in FY05 to US$ 1.7 billion in FY16. In comparison, imports from China have grown exponentially — increased from US$ 1.8 billion in FY05 to US$ 13.9 billion during July-May FY17. China now occupies the largest share in Pakistan’s total imports (i.e. 29 percent), followed by the UAE (13 percent).

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The rise in imports has been mainly attributed to a surge in machinery and equipment from China, as well as the diversion of imports from other trading partners towards China. There has also been a surge of import of low-cost consumer goods, which has not only boosted local retail businesses, but also benefited local consumers through the availability of items such as computers, medical equipment, consumer durables, mobile phones, automobile spare parts, toys, electrical goods and accessories, etc. – all at lower costs than before CPFTA.

However, the influx of cheap imports from China has also had some adverse effects, especially on the domestic manufacturing sector. Anecdotal evidence suggests that local manufacturers of ceramics, electric machinery, and equipment, chipboard, plywood, bicycles, etc., and a number of small scales industries have been affected by low-cost imports from China.

The items in which Pakistan lacks a competitive advantage–such as telephone sets, digital cameras, electrical machines, children toys, etc.– are included in the tariff elimination list of China. 

The flood of imported consumer goods and the non-availability of their local substitutes point to local SMEs [Small and Medium-sized Enterprises] losing ground in the domestic market. The increasing trade gap poses a potential risk that may also be a reflection of a decrease or stagnancy in local production given the similar product composition of the two countries. Some other factors affecting local SMEs also remain in play, such as relatively higher energy costs, less efficient governance, and most importantly poor human resources compared to competitor countries.

While Pakistan’s exports to China have grown, the volumes relative to the imports remain small, as they have not gained much from tariff concessions under CPFTA. It also has to be acknowledged at the onset that Pakistan’s export potential is limited given China’s competitive advantage in most major producing sectors.

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For instance, while the textile industry is the main pillar of Pakistan’s exports, China is also a major and cheaper textile manufacturer for reasons already mentioned. In order to fully exploit the export potential to as large a market as China, Pakistani businesses need to take a more innovative export approach than they have tried so far, which could include diversification of their export base.

New opportunities, which will expand as the Chinese growth model shifts from one largely driven by exports to increasingly being dependent on domestic consumption, need to be explored by Pakistani businesses. Moreover, as Chinese Industries moves up the value chain, Pakistan should try to persuade Chinese businesses to relocate their declining industries to locations in Pakistan.

Pakistan also needs to do much more in terms of providing a conducive environment to attract Chinese manufacturing capacity to relocate to Pakistan.

As per the Tariff Reduction Modality (TRM) of China, some Pakistani products having relatively greater export potential are still facing high tariff rates, and have not been given concessions in China’s offer list. China has provided Pakistan zero duty on only 75 percent of the total tariff lines, compared with over 90 percent to Malaysia, Indonesia, the Philippines, and Thailand, provided under ACFTA (ASEAN-China Free Trade Area). The items in which Pakistan lacks a competitive advantage–such as telephone sets, digital cameras, electrical machines, children toys, etc.– are included in the tariff elimination list of China.

Despite China’s imports from the world rising, those from Pakistan have not shown a matching increase. The share of Pakistan’s exports in China’s imports from the world remains relatively insignificant. Pakistan should try to seek further preferential concessions in areas where the country has consistently performed well with the rest of the world, and in which, China also trades with other countries.

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However, none of the concessions would make much difference if Pakistani entrepreneurs do not gear up their quality to meet the high standards of the Chinese market. Pakistan also needs to do much more in terms of providing a conducive environment to attract Chinese manufacturing capacity to relocate to Pakistan.

Ali Hassan is a freelance journalist based in New York. He’s an economics and political science graduate of NYU and writes about the Middle East, Afghanistan, and films. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space. 

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